The 35-year old midfielder has left QPR to take up the crucial role for the club he first joined as a 10-year old.
Derry will arrive at Meadow Lane with former Carlisle United manager Greg Abbot as his assistant which will provide the club with plenty of experience both on and off the pitch.
"When we, as a Board, sat down to identify the credentials that we were looking for in our next manager, we were agreed that we needed someone who understood this club and what it means to our fans," chairman Ray Trew told the club's official website.
"I have to be honest and admit that Shaun wasn't someone that we had thought of initially, but that was only because he was still enjoying a successful career as a player at a higher level.
"However, when he contacted me to declare an interest in the position, he was an applicant that we simply couldn't ignore.
"Shaun is someone who can relate to the players and, perhaps more importantly, relate to this club, but he is not naive enough to think that he could take this step alone.
"That is why he has turned to Greg Abbott, a man with a wealth of experience in the Football League, as a coach and manager, and someone that he has worked with in the past, to assist him in his new role.
"Having met with them both at length I am confident that they have what it takes to not only turn our fortunes around this season, but to go on and deliver the success and stability that we are craving here at Meadow Lane."
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